Barr: Requiring discount window readiness could break 'stigma'

By Howard Schneider

AMELIA ISLAND, Florida (Reuters) - The U.S. Federal Reserve is considering new rules to break the "stigma" around borrowing from the central bank's discount window to cover short-term cash needs, Fed vice chair for supervision Michael Barr said on Monday.

"We've made good progress over the last year," since the failure of Silicon Valley Bank exposed gaps in the Fed's main lender-of-last-resort program, Barr said at an Atlanta Fed conference.

"What we're hoping is that a requirement for discount window preparedness, pre-positioning of collateral, testing, will help to reduce stigma because we're obviously sending a signal that we want banks to use this."

SVB before its March 2023 collapse had not recently tested its discount window access nor did it have adequate collateral posted there; though neither would have saved SVB, regulators say borrowing from the Fed could have allowed a more orderly failure and reduced the broader banking turmoil that ensued.

U.S. financial regulators have since stepped up efforts to encourage banks to be ready to borrow in an emergency from the central bank. Banks in turn have boosted the collateral they stow at the Fed's discount window, to $2.6 trillion as of the end of last year, from $1.9 trillion a year earlier.

But even that may not be enough to ensure that banks will borrow, analyst say, given banks' worry that tapping the discount window could make investors and supervisors question their soundness.

"Every bank uniformly said that it's been hammered home to them by bank examiners ... that using the discount window is not okay," said Bank Policy Institute chief economist Bill Nelson, citing conversations he has had with 17 bank treasurers since the beginning of this years.

Indeed, though the vast majority of banks have signed up to the discount window, Fed data show, fewer than half have the collateral in place to ensure they can borrow rapidly when needed.

Regulators currently do not count borrowing capacity at the discount window as a liquidity resource, Nelson said, and doing so would go a long way toward ending stigma.

Yale School of Management's Susan McLaughlin agreed, adding, "we should do everything we can to eliminate stigma."

Among her proposals: to more clearly differentiate the Fed's lending program for strong banks and its program for weaker banks.

The fact that both are currently offered under the discount window likely contributes to stigma, she said, and keeps banks from borrowing from the Fed until it's too late to be effective.

(Reporting by Howard Schneider with reporting and writing by Ann Saphir in San Francisco; Editing by Chizu Nomiyama and Nick Zieminski)